GLOBAL MARKETS-Stocks gain, dollar down; U.S. manufacturing slips

* Contraction in U.S. manufacturing is first in six months * Dollar falls below 100 yen, lowest since early May * Stocks first fall on weak U.S. data but later recover asinvestors assess QE outlook

NEW YORK, June 3 (Reuters) - Stocks rose but the U.S. dollarfell on Monday in a volatile session after data showed U.S.manufacturing activity contracted for the first time in sixmonths, raising concerns about the health of the U.S. recoveryand the outlook for central bank stimulus. Markets have become particularly sensitive to U.S. datasince the Federal Reserve started to raise the prospect ofscaling back its bond-buying program if the economy shows it ison a sustainable growth path. The Institute for Supply Management reported that its gaugefor new orders slipped last month and said there was less demandfor exports. The manufacturing data raiseddoubts about at least a tapering off of Fed stimulus measures,which many in the foreign exchange market were betting on. Butstock investors, at least for now, like the idea that the Fedcould maintain measures to keep growth on track. The Nasdaq composite index fell as much as 1 percent at thesession trough but later recovered. The Dow industrials rose,however, helped by a 4 percent jump in shares of drug makerMerck & Co. following the results of a melanoma drugstudy. Investors were also eying Friday's monthly U.S. non-farmpayrolls data, and analysts cautioned on price swings throughoutthe week. "Everything seems to be hinging on what people think the Fedwill do with quantitative easing and the bond buybacks thatthey're doing. I think that's the main thing," said BryantEvans, portfolio manager at Cozad Asset Management, inChampaign, Illinois. The Dow Jones industrial average gained 138.46points, or 0.92 percent, to 15,254.03. The Standard & Poor's 500Index was up 9.68 points, or 0.59 percent, at 1,640.42.The Nasdaq Composite Index was up 9.45 points, or 0.27percent, at 3,465.37. While Monday's data was important, the clear focus acrossfinancial markets is the U.S. payrolls report for May, which mayguide the Fed's thinking on its monetary stimulus more than anyother report. Wall Street analysts expect 170,000 jobs were added lastmonth, slightly above the 165,000 added in April, according to aReuters poll. If the payrolls report is strong, the poor ISM data would beeasily forgotten and the dollar would rally, said Alan Ruskin,head of G10 FX strategy at Deutsche Bank in New York. Overall,he believes U.S. employment data will be the determining factoras to whether the Fed will wind down its asset purchase program.

TURKISH SHARES PLUNGE The dollar fell below 100 yen, its lowest level in nearly amonth, after the U.S. manufacturing report prompted investors tosearch for safer havens. It lasted traded at 99.48 yen. "If this is truly the start of a broader market panic, webelieve the Japanese yen may be one of the largest beneficiariesas speculators stampede for the exits," said David Rodriguez,quantitative strategist at DailyFX in New York. Markets in Asia and Europe were rattled early in the globalsession by data showing China's economy lost steam last month,with factory activity shrinking for the first time in sevenmonths and slower growth in services. MSCI's world share index, which tracksstocks in 45 countries, was up 0.1 percent on the back of U.S.gains in late New York trading. Turkish shares plummeted more than 10 percent after riots across the country. The Istanbul bourse fell to itslowest level since Feb. 26 after several days of anti-governmentprotests. Earlier, a brighter-than-forecast reading on PMI data fromEurope drove a rebound in top European shares, though they fellafter the U.S. ISM data. TheFTSEurofirst 300 closed down 0.7 percent.